Conservatives insist on extending the bonus tax cuts enacted in 2001 for the top 2 percent of income earners. They also make clear that they will hold up tax relief for the middle class to get their way. President Barack Obama, progressives, and fiscally responsible members of Congress should stand firm. This month’s electoral “shellacking” changed the political landscape in Washington. But it didn’t change three basic facts about the bonus tax cuts for the rich:
- These tax cuts haven’t and won’t create jobs.
- They would blow an enormous hole in the budget.
- The American people want them to expire.
Additional tax cuts for the top 2 percent won’t create jobs
Weak economic growth, a weaker job market, expiring unemployment benefits, and state budget shortfalls all threaten to stall the economic recovery. And they call for decisive action to restore consumer demand, growth, and jobs. At the same time, there is great concern about federal budget deficits. The United States does indeed face long-term structural budget deficits that will need to be addressed in time.
The right response to coping with the need to create jobs now and deal with our fiscal problems is to pursue measures that pack a big short-term punch but carry relatively few long-term costs, even if they add to the deficit now.
Extending the bonus tax cuts for the wealthy does the exact opposite. It would provide far less economic boost now relative to almost any other legitimate option, but it comes at a huge long-term price: $80 billion over the next two years and $690 billion over the next decade.
What’s more, if the Bush tax cuts were effective at creating jobs they would have done so already. Since the major tax cuts were enacted in 2001 the economy has lost jobs despite a growing population. Most of the jobs were lost in this recession, but job growth was anemic even before then—only 4.7 million private sector jobs were created from when the first round of Bush tax cuts were enacted in 2001 until the recession began in 2007. That compares to the 18.2 million private sector jobs created in the corresponding period after the Clinton-era tax increases were enacted in 1993. [1]
Conservatives have been repeating the mantra that no one’s taxes can be raised during a recession. That’s fundamentally misleading in two ways.
First, as Michael Ettlinger explains, if only the misnamed “middle-class tax cuts” are extended, all taxpayers would receive a tax cut compared to what they will pay if the law doesn’t change—even the rich. Second, there’s no fundamental reason why wealthy people can’t pay slightly higher taxes as the economy climbs out of a recession. Top-bracket tax rates were raised twice during the early 1990s, shortly before and shortly after a recession. The top rates were raised from 28 percent to 31 percent in 1990, and then again to 39.6 percent in 1993—a much steeper rate hike than simply allowing the current 35 percent top rate to revert to 39.6 percent.
What followed was an unprecedented economic expansion, notwithstanding doomsday predictions by conservatives.
The president and Congress must weigh extending the top-bracket tax rates against the costs and against the alternatives—as with all policies. Extending the bonus tax cuts even for the next two years would cost about $80 billion. That money would be much better spent ensuring that unemployment benefits don’t run out, and that teachers and other state employees aren’t laid off. In fact, there’s a long list of ways it would be better spent.
Extending the bonus tax cuts for the wealthy would blow an enormous hole in the budget
Deficits will become a real problem in the coming years. Last week, the co-chairs of President Obama’s debt commission outlined proposals to bring the debt under control in the long term. Their proposal included painful and harmful cuts to many important programs. It also made clear that the federal government will need to raise significantly more revenue than it does now. Under their plan revenues would eventually equal 21 percent of gross domestic product compared to about 15 percent this year.
It is clear that there will be painful choices ahead regardless of one’s views on the co-chairs’ proposals, which makes wasting money on ineffective policies such as extending the bonus tax cuts for the wealthy fiscal insanity. A permanent extension would add $690 billion to the public debt over the next 10 years. Borrowing an additional $690 billion actually ends up costing $830 billion once higher payments for debt service are included. That much additional debt would make the task of deficit reduction even more painful and difficult.
Even a short-term extension of the tax cuts for the wealthy would send a message to global markets that the United States is incapable of taking sensible, popular steps toward fiscal responsibility. That would potentially undermine the confidence needed for the recovery to succeed while increasing borrowing costs in the future.
Americans want the bonus tax cuts to expire
The bonus tax cuts are ineffective, irresponsible, and also unpopular. The American people support ending them, and this support is consistent and by wide margins. Letting the bonus tax cuts expire is the popular, centrist position.
Consider the following:
- Fifty-three percent of Americans believe letting the tax cuts on income above $250,000 expire is a good idea compared to 38 percent who believe it is a bad idea, according to a CBS/New York Times poll.
- According to a Democracy Corps poll 55 percent believe that the high-end bonus tax cuts should expire while only 38 believe they should be extended.
- Fifty-eight percent of respondents to a Pew Research Center poll say they believe the Bush tax cuts for the wealthy should be repealed including those who believe all of the Bush tax cuts should expire. Thirty-four percent believe they should be extended.
- Gallup’s results were nearly the same: 59 percent support ending the Bush tax cuts for the wealthy while 37 percent would keep them.
Public opinion is clear on this issue, and it reflects common sense. It is sheer lunacy to dig even deeper into debt to give tax breaks to a narrow sliver of people whose incomes average $800,000 per year. President Obama and Congress should let the bonus tax cuts fade into the sunset with the other unfortunate economic legacies of the Bush years.
Seth Hanlon is Director of Fiscal Reform for CAP’s Doing What Works project.
Endnotes
[1]. Source: Bureau of Labor Statistics, Total Private Employment (comparing August 1993 – February 2000; June 2001 – December 2007).
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